Financial Crimes Enforcement Network
Financial Crimes Enforcement Network
Commercial Real Estate Financing Fraud
1
Financial Crimes Enforcement Network
Commercial Real Estate Financing Fraud
Suspicious Activity Reports by Depository Institutions January 1, 2007 ? December 31, 2010
March 2011
Commercial Real Estate Financing Fraud
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Financial Crimes Enforcement Network
Table of Contents
Executive Summary
1
Purpose
3
Background
4
Methodology
6
Research and Analysis
7
Suspicious Activity Examples
14
Next Steps
25
Appendix
26
Commercial Real Estate Financing Fraud
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Financial Crimes Enforcement Network
Executive Summary*
The number of depository institution Suspicious Activity Report (SAR) filings reporting commercial real estate financing fraud (hereinafter "CRE fraud") almost tripled between 2007 and 2010, reflecting the challenges facing the commercial real estate (hereinafter "CRE") sector and the ever-present opportunity for fraud. In contrast to mortgage loan fraud SARs predominantly submitted by large financial institutions, filings reporting potential CRE fraud came from institutions of varying sizes and locations, indicating that CRE fraud may affect a broad range of reporting institutions.
CRE loans totaling an estimated $1.4 trillion will reach the end of their terms between 2010 and 2014,1 and some analysts anticipate a delinquency rate of 10 percent on these loans.2 Given the size and potential future volatility of the CRE market, SARs may play an important role in providing law enforcement and regulators with intelligence on techniques, trends, and patterns of suspected illicit activity within this market.
Of the filers who reported dollar amounts involved, the greatest concentration (45 percent), reported suspected fraud in transactions valued under $1 million.3 Nine percent of transactions were valued at $10 million or more. Approximately half of CRE SARs named subjects located in five states: Georgia, Illinois, Florida, New York, and California.
Filers noted several different kinds of suspicious activity related to CRE fraud. The top four reported categories in order were: False Documents, Misappropriation of Funds, Collusion-Bank Insider, and False Statements.
* Reference in this report to any specific commercial product, service, process, or enterprise, or the use of any commercial product or enterprise, trade, firm, or corporation name is for the information and convenience of the public, and does not constitute endorsement or recommendation by the Financial Crimes Enforcement Network. With respect to materials generated by entities outside of the Financial Crimes Enforcement Network, permission to use these materials, if necessary, must be obtained from the original source. The Financial Crimes Enforcement Network assumes no responsibility for the content or operation of other Web sites.
1. Congressional Oversight Panel, February Oversight Report ? Commercial Real Estate Losses and the Risk to Financial Stability, Page 2, 10 February 2010 at
2. Business Wire, "Fitch U.S. CMBS Newsletter: New Issuance Leads to Lower Delinquency Forecast of 10%," 7 January 2011 at
3. Statistics in this paragraph derive from the total average of SAR fillings from 2007 through 2010.
Commercial Real Estate Financing Fraud
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Financial Crimes Enforcement Network
"False documents" included fraudulent rent rolls related to multi-family residential and commercial property, tax documentation, identification documents, appraisals, and forged signatures.4 Filers reported subjects misappropriating funds in several ways, including diverting the proceeds of commercial loans to fund personal expenses or to support businesses facing insolvency.
Examples of fraud or illicit activity reported in SARs and described in this report include a case where a bank insider's suspicious client base allegedly moved with him from employer to employer.5 Also described are examples where customers reportedly sold CRE collateral without disclosure to the lender, pledged the same collateral for multiple purposes, and hid or conveyed collateral to associates.
FinCEN will use this study, and other studies like it, to inform future rulemaking and to provide information that may be of value to financial institutions. Additionally, studies like this one further our ongoing efforts to support law enforcement in allocating resources and the investigation and prosecution of individual criminal cases. Making public this type of study helps banks and other financial institutions spot and report illicit activity to FinCEN that is useful to state, local and federal law enforcement and regulators.
4. Rent rolls are documents that state how much rent the property owners receive per unit. Filers reported numerous instances in which borrowers submitted inflated rent rolls to enhance their loan application.
5. For this study, the term bank insider refers to persons employed by the lending institution. In most instances, bank insiders were commercial lending officers.
Commercial Real Estate Financing Fraud
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